Snap Analysis: Rio, BHP to boost iron output after quitting jv

By James Regan

SYDNEY (BestGrowthStock) – Following are the implications of Monday’s decision by Rio Tinto (RIO.AX: ) and BHP Billiton (BHP.AX: ) to scrap their $116 billion iron ore joint venture in Australia:

* The decision will have no immediate impact on global supplies of iron ore but could prod both companies to accelerate their longer-term, separate expansion plans. The venture was primarily aimed at saving $10 billion in duplicate costs on rail and port operations, not boosting production.

* Global steel-makers will be happy because they had feared the venture would give the world’s second and third largest iron ore miners too much control over pricing. Global iron ore prices (.IO62-CNI=SI: ) are at their highest in nearly five months on strong demand from Asian steel mills.

* However, Rio Tinto and BHP Billiton will not abandon all efforts to find cost savings by sharing infrastructure in the Pilbara iron ore belt, despite the demise of the venture. They will still look at sharing rail and port infrastructure under a separate agreement with the Western Australia state government.

* This arrangement in Western Australian could save the two companies up to $5 billion, half the savings envisaged under the joint venture. Though much less ambitious than the venture, this initiative with the government still runs the risk of upsetting steel-makers and competition regulators.

* BHP Billiton can now focus more squarely on its $39 billion hostile offer for the world’s biggest fertilizer maker, Potash Corp (POT.TO: ), without the management distraction of having to persuade global regulators of the merits of the joint venture.

* BHP Billiton may also fast-track its iron ore expansion plan, dubbed Rapid Growth Project 5, which would take its annual output to nearly a half-billion metric tons. The plan would firstly take overall capacity to more than 200 million metric tons a year starting in 2011 from a projected 155 million this year.

* Rio Tinto may now allocate more of its planned $13 billion capital expenditure program to iron ore, because it can no longer count on the $5.8 billion equity payment promised by BHP Billiton under the terms of the joint venture.

Snap Analysis: Rio, BHP to boost iron output after quitting jv